What is a Comparative Market Analysis?
In the world of Real Estate Investing, CMA stands for Comparative Market Analysis. A CMA should give you information on recent sales and active listings that are similar to the property you are looking to buy and sell within your geographic region.
CMA versus an Appraisal
A CMA should not be confused with an appraisal. A CMA is generally prepared by a realtor based on their subjective opinion. An appraisal is prepared by a licensed appraiser and is a legal document.
A CMA is merely another tool to add to your real estate investing strategy. It should be used when evaluating real estate value to give you a better idea of the value of the property by comparing it to similar homes nearby.
What is a Comparative Market Analysis
As it is a subjective analysis, there are no hard and fast rules about what a CMA should include, but it should, at a minimum, include the following.
A CMA should include a review of the house you are interested in buying or selling. This review should include objective factors like:
- Number of rooms
- Type of rooms
- Square footage
- Lot size
- Amenities such as swimming pool, garages, fireplaces, central air conditioning, generators, etc.
It should also assess the condition of the house and its proximity to exterior conveniences or nuisances (for example, close to schools and shopping add value, close to train tracks or highways detracts value).
Recently Sold Comparables
The CMA should list recently sold homes that have the same profile (similar number of rooms, square footage, amenities, exterior proximities, etc.) from the last six months.
There will unlikely be a perfect match, but it should provide information on at least three similar, or comparable sales. It is important that the CMA include the prices these properties sold for.
The CMA should then include information on comparable real estate currently on the market. Again, pricing is important. As these properties are not sold, you cannot assess a value to them, but you may be able to see the length that something is on the market, and can reasonably assume that the listing price is too high if the time is extended.
How To Do a CMA
Generally, a realtor with access to proprietary websites should be able to provide a CMA, but if you are not a realtor and want to prepare your own CMA, you may be able to do so.
Collect the Data
There are several websites that give you a lot of information on listings and sales. The Federal Housing Finance Agency website (FHFA.gov) contains a lot of information on homes sales within a region and property value trends.
Zillow, Redfin and Trulia are all useful in showing sales, listing prices and amenities of recently sold and listed homes. These sites are not always 100% accurate, so look carefully at the information they give you and discard any outliers.
Once you have gathered all of this information, set up a grid to compare them. Show the address of each property, its proximity to the subject property and work from the closest to the furthest away. The closer the property is to the subject property, the more weight to give the value.
Calculate Price per Square Foot
Assess the square footage. If they are about the same size, you should expect the value per square foot to be similar. To calculate the price per square foot, use the following formula:
Price Per Square Foot = Selling Price / Square Footage
For example, a house that sold for $150,000 and is 2,500 square feet has a price per square foot of $60.00.
Amenities and Location Review
Compare amenities and location. If the subject properties has better amenities, you can increase the value. If it has worse amenities, you can decrease the value. Then look at location and condition, and make similar upward and downward adjustments.
The value of each adjustment changes by region, so it is hard to give direction, but if you look at enough comps, you will see a pattern as to what factors raise or lower the value of the home in the area you are looking at.
Lastly, be honest with yourself.
Is the property you are interested in as attractive as the comps? Is the condition going to be better or worse? Don’t try to convince yourself that your property is worth a certain amount if the evidence is clearly to the contrary.
If you are honest with yourself and conservative in your CMA review, you should come up with a solid value.
Remember, you don’t want the highest value possible, you want the most realistic value possible.